Activity in the U.S. oil and gas industry slowed during the third quarter, raising questions about the sustainability of the recent boom. The Dallas Federal Reserve reported that while oil production saw a slight increase compared to the second quarter, natural gas activity dropped significantly. This aligns with other reports indicating reduced gas production and a deceleration in oil output after substantial gains last year.
According to the Dallas Fed, this marks the second consecutive quarter of modest growth in oil production, suggesting that the slowdown could be a longer-term trend rather than a temporary dip. Several factors contribute to this trend, including fluctuating oil and gas prices and uncertainties surrounding the upcoming November election.
The significance of oil prices was underscored in the Dallas Fed’s survey. When asked if companies planned to increase production in the Permian Basin once the current natural gas pipeline shortage was resolved, 80% of respondents indicated they would not. Additionally, 92% of participants did not foresee any constraints on oil production from pipeline capacity through 2026.
Despite having the potential for increased production, oil output is not rising as rapidly as in the past. Many companies are cautious about expanding their operations at this time. Some executives predict that higher oil prices could emerge in the medium term due to the decline in U.S. shale production. One executive noted, “We believe the world is quickly running out of $60 barrels, heading towards $100+ barrels within the next five years.”
However, OPEC+ has recently hinted that it may not adhere to its current production cuts indefinitely. Reports from the Financial Times indicated that Saudi Arabia is contemplating reversing its production cuts to regain market share as it adjusts to lower prices. Meanwhile, Russian official Alexander Novak stated that plans to restore supply in December remain unchanged.
These developments led to a significant drop in oil prices, highlighting growing concerns about demand and the limited positive factors supporting the market. One survey respondent pointed out, “Deflationary pressures in China are curtailing oil demand. India is purchasing cheap Russian oil, which is also capping global prices.”
The respondent also warned that prices could fall to as low as $55 per barrel, depending on the U.S. economic outlook. Such low prices would hinder strong supply growth, regardless of improvements in drilling efficiency, as increased production could lead to even lower prices.
Natural gas producers have already faced a similar situation, with profits declining due to excess production. Many producers have started shutting in wells and delaying drilling plans, resulting in a decrease in natural gas production, as confirmed by the latest Dallas Fed survey. This supply constraint could eventually lead to higher prices, especially with an anticipated surge in electricity demand from data centers.
Despite these challenges, some industry executives express concern about the future of U.S. shale. One respondent likened the industry’s decline to the famous quote from author Ernest Hemingway: “Gradually, then all of a sudden.” This sentiment echoes the views of Wil VanLoh, CEO of Quantum Energy Partners, who stated that “the U.S. shale revolution has run its course.” He emphasized that investors are now demanding significant cash returns from oil and gas companies, limiting their ability to reinvest in growth.
VanLoh acknowledged that the U.S. has significantly increased oil and gas production over the past 15 years but cautioned that further major supply gains appear unlikely. While U.S. shale has surprised the market in the past, the outlook remains uncertain, and without favorable prices, another substantial production increase this year seems less probable.
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